Summary

Creates a new Internal Revenue Code rule that lets individual investors delay recognizing taxable gain when a regulated investment company (RIC) pays a capital gain dividend that is automatically reinvested under a dividend reinvestment plan (DRIP). The deferred gain is reported later when the shareholder sells or redeems the reinvested shares or upon the shareholder’s death; reinvested shares are given a special holding period (treated as held for 1 year plus 1 day). The provision excludes certain taxpayers and directs Treasury to issue implementing regulations.

Key Points

• Allows individual shareholders to defer reporting gain on RIC capital gain dividends automatically reinvested under DRIPs.
• Deferred gain becomes taxable on sale, redemption of the reinvested shares, or on the shareholder's death.
• Shares bought by automatic reinvestment receive a holding-period credit of 1 year plus 1 day for long-term capital gain treatment.
• Certain taxpayers are excluded from using the deferral; Treasury must issue implementing regulations.
• Shifts timing of tax recognition (deferral), likely requiring new tracking and reporting by funds, brokers, and tax preparers.
• Does not repeal taxation of the gain—it merely postpones recognition until a later triggering event.
• Regulations will be needed to define scope, prevent abuse, and set recordkeeping/reporting rules.
• Potential interactions with basis-step-up at death and existing tax rules will need clarifying guidance.

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